How to Choose the Best Fixed Rate Loan Term for Your Needs
When choosing the best fixed rate loan term for your needs, consider factors such as your financial goals, income stability, and the length of time you plan to stay in the property or hold the loan.
What is a Fixed Rate Loan?
A Fixed Rate Loan is a loan where the interest rate is guaranteed to remain the same during an initial term (years), regardless of what may occur in the market with variable rates.
Traditionally, lenders have offered terms of between 1 – 5 years for fixed rates, however some Lenders may offer terms of up to 10 years.
Fixed Rate term loans normally require the loan to be renegotiated at the conclusion of the fixed term, thus a five year fixed term loan would normally be required to be repaid in full at the end of year 5. However, most Lenders have the ability to arrange for the facility to revert to the Standard Variable Rate after the Fixed Rate term has expired. Therefore, a loan facility can be established for a 25 or 30 year loan term with the first five years, fixed at a specific interest rate.
Why are Fixed Rate Loan So Popular?
Fixed-rate loans are a type of loan that is favoured by borrowers who want to approach borrowing with caution and are seeking stability in their loan repayment plan. With fixed-rate loans, borrowers are assured that the loan repayment amount will remain constant for the entire fixed rate period, providing them with the peace of mind that they can budget for their loan payments effectively.
Moreover, fixed-rate loans are also popular among property investors because they provide a sense of security in the form of guaranteed repayments. However, borrowers need to understand that taking a fixed-rate loan involves committing to a contract with the lending institution for a specific term. If the borrower breaks the contract or changes the term, the lender may charge significant fees to cover the costs of breaking the contract, known as “break costs.”
These break costs can be quite expensive and are influenced by various factors, such as
- The remaining term of the loan,
- The current interest rate environment, and
- The outstanding balance amount.
It is essential to note that estimating break costs at the time of taking out the contract is not possible, and borrowers need to factor in this potential expense before committing to a fixed-rate loan.
Details To Watch For.
When considering a fixed-rate loan, it’s important to be aware of the potential restrictions that lenders may place on extra repayments. These additional repayments refer to any payments made on top of the minimum required payment during the fixed rate period of the loan.
Some lenders may have limits on the amount of additional repayments that can be made annually, and exceeding these limits may result in penalty fees. In addition, some lenders may have a cap on the amount that can be repaid as an additional contribution each year, with the maximum amount ranging from $2,000 to $10,000.
It’s worth noting that only a few lenders allow unlimited additional repayments without any penalty, so it’s important to review the specific terms and conditions of each loan before making a decision. These restrictions can vary from lender to lender, and may have a significant impact on your ability to pay off the loan early or make additional contributions towards reducing the overall interest paid. Therefore, it’s crucial to consider these restrictions when comparing different fixed-rate loan options.
Can I Have A Fixed And Variable Rate Loan Together?
If you like the idea of a fixed rate and are unsure of the rate fluctuations in the current interest rate market you can split your loan into 2 loans. Fix one portion of the loan and have the other portion at a standard variable rate loan to fluctuate with market rates.
For example; if you have a $500,000 loan, you may wish to split your loan into a $300,000 fixed rate loan and the other portion of $200,000 at a variable rate loan.
By fixing the $300,000 loan you know what the repayments will be every week, fortnight or month over the term (years) of the fixed period. The variable portion will fluctuate in the market conditions & if rate rises your repayments are only higher on the variable rate amount of $200,000 and not on the $300,000 which is fixed.
If the reverse happens with rate dropping, then you’re not locked in on a $500,000 loan fixed at a higher rate as you we enjoy and benefits of a split loan.
Fixed rate loans are not for everyone and you will need good financial advice, therefore talk to us before you lock in a fixed rate.
Let Neomoney help you with a great fixed rate today.
Are you ready to take the next step towards your dream home? Our team of mortgage specialists is here to help you find the perfect loan product tailored to your unique needs. Whether you're seeking credit advice or simply looking for more information, we're here to answer any questions you may have.
To get started, just click on the enquiry button below and we'll be in touch with you shortly.
Let's make your homeownership dreams a reality!